Comstock Homebuilding Companies, Inc. — Q2 2011 Form 10-Q
Business context and reporting period. The filing covers the quarter and six months ended June 30, 2011. The company operates in the Washington, D.C. area across homebuilding, apartment buildings and real estate services. Amounts below are in millions unless otherwise noted.
Financial performance and position
- Revenue: Q2 revenue was $5.90, down 8% from $6.43 a year earlier. Homebuilding revenue fell to $3.12 from $5.92; apartment and real estate services revenue rose to $2.78 from $0.51, largely reflecting general contracting work. Six-month revenue was $10.49, down 33% from $15.57.
- Profit and margins: Q2 net loss attributable to Comstock was $1.68 ($0.09 per share), compared with a $1.84 loss ($0.10 per share). Six-month attributable net loss was $2.70 ($0.15 per share), versus $2.74 ($0.15 per share). Q2 gross profit was $0.54 (about 9% of revenue), compared with $0.34 (about 5%); six-month gross profit was $1.13 (about 11%), versus $0.92 (about 6%). Operating losses were $1.85 for Q2 and $3.01 for six months.
- Cash flow: Six-month operating cash flow was positive $2.82, versus $10.82 in 2010. Investing used $6.05, principally for Cascades apartment construction; financing provided $3.37. Cash and cash equivalents ended June at $0.61, while restricted cash was $3.09.
- Assets, debt and liquidity: Total assets were $42.50 and total liabilities $35.58 at June 30. Reported borrowings totaled approximately $29.66, including $5.01 owed to an affiliate; the maturity schedule lists $4.67 due in 2011 and $9.03 in 2014. Real estate held for development and sale was $26.69. Management cited refinancing, settlement proceeds, home sales and other operating activity as supporting operations through 2011.
- Other metrics: The company delivered 13 homes in Q2 and 20 in the first half, versus 18 and 34, respectively, in 2010. At June 30, four homes were in backlog, with $1.3 of expected revenue. No impairment charges were recorded in the first half.
Material changes versus prior periods
- Fewer available units and deliveries drove the decline in homebuilding revenue. Remaining inventory included 37 Eclipse units and 55 Penderbrook units, down from 56 and 81 a year earlier.
- Six-month gross new home orders fell to $7.2 on 25 homes from $10.5 on 32 homes; average gross order value declined to $289,000 from $329,000.
- Apartment and real estate services revenue increased, particularly in Q2, as general contracting work replaced much of the rental revenue mix. General contracting generated $3.6 revenue and $0.4 gross profit in the first half.
- SG&A increased to $3.32 for six months from $2.86, primarily due to compensation expense associated with restricted stock grants. Expenses for inactive projects fell to $0.82 from $1.67.
- The company began construction of a 103-unit Cascades apartment project and consolidated the project entity as a variable interest entity. A $2.35 private placement funded part of the project; investors’ interests have a cumulative, compounded 20% preferred return, subject to project performance.
Outlook, risks and unusual items
- Post-quarter financing: On July 12, the company secured a three-year $13.79 loan at 12.5% to refinance Eclipse and repay approximately $9.0 owed to Eagle Bank, with remaining proceeds for fees and general corporate purposes. The loan requires interest-only quarterly payments, specified unit-sale proceeds and a minimum sales pace. The company also provided broad guarantees and security; the lender’s affiliate received a warrant for 1 million shares at $1.03 and registration rights.
- Penderbrook refinancing: Sunbridge issued a commitment for up to $7.0 of three-year financing, at a stated 12.5% interest rate, to refinance the Guggenheim debt. The company expected to draw on it during 2011; the filing does not report that it had funded by the filing date.
- Litigation settlement: On July 21, the company agreed to settle the Balfour Beatty dispute for $10.293, below its prior $11.963 judgment. Proceeds were received August 4; $4.6 was used to reduce debt. The Sunbridge loan terms also specify payment of 50% of proceeds from the judgment.
- Management outlook: Management stated that financing, the settlement proceeds, home settlements and other operating activities provided resources it believed sufficient to sustain operations through 2011. No longer-term earnings or revenue guidance is provided.
- Risks and contingencies: Risks include substantial debt and refinancing needs, variable interest rates, home-sale pace, real estate market conditions, access to capital and possible impairment of real estate estimates. A Penderbrook condominium association lawsuit alleges approximately $1.0 in structural-defect damages; the company intends to defend it and does not expect a material adverse impact. At June 30, letters of credit were $0.53 and performance/payment bonds $2.23; none had been drawn. The filing also describes risks to tax net operating losses from a potential ownership change.
- Controls: Management concluded disclosure controls were effective as of June 30 and reported no material change in internal control over financial reporting during the quarter.
Most important facts for investors to verify
- Whether the Penderbrook refinancing closed, on what final terms, and how proceeds were applied.
- Cash available for operations after restricted cash, required debt curtailments and project-level obligations.
- Compliance with loan sales-pace and other covenants, upcoming maturities, and exposure to variable rates and the 12.5% Sunbridge financing.
- Actual sales, pricing and remaining inventory at Eclipse and Penderbrook, and progress and financing needs for the Cascades project.
- Accounting treatment and cash allocation of the Balfour settlement, the Penderbrook structural-defect claim, and the Cascades investors’ preferred return.